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BC2007-0015
October 9,2007

F o r meeting o f
Committee: Wednesday, October 10,2007

BUDGET COMMITTEE

FROM: The Secretary, Budget Committee

Improving the Planning, Budgeting and PerformanceManagement Process

The attached material entitled Improving the Planning, Budgeting and Performance
Management Process, will be the basis o f the discussion at the Budget Committee meeting scheduled for
Wednesday, October 10.2007.

Questions on this document should be addressed to Mr. G. M i l e s (ext. 35506).

Distribution:

Committee For Information

Mr. Deraman Other Executive Directors and Alternates
Mr. Gibbs President
Mr. Mordasini Bank Group Senior Management
Mr. Ong Seng Vice Presidents, Bank, IFC and MIGA
Mr. Shah
Mr. Shikibu
Mr. Studart
Mr. Watson

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its content!
may not otherwise be disclosed without World Bank Group authorization.
The Strategy, Budgeting, and Performance Management Process:
Overview and actions to improve its effectiveness

August 31,2087
 I- Introduction
1. This note follows from a series o f interactions and engagements between the
Budget Department and the Budget Committee in relation to the Bank’s planning and
budgeting cycle. I t responds to Directors’ request to provide a broader vision o n the
strategy, budget, and performance management process - including how to improve the
incorporation o f results into budgeting conversations. Thus, the paper provides Directors
the framework necessary to assess the specific actions that management proposes t o
undertake to make the process more effective.
2. The note is organized as follows. Section I1summarizes the major influences o n
the current state o f the process thereby providing the necessary context. A short
elaboration o f the underpinnings o f the strategy, budgeting, and performance
management process i s found in Section I11along with a description o f past actions to
improve the process. Section N presents an action plan o f specific tasks that will make
the process more effective in the h t u r e .

11. Context
3. Like most organizations, the Bank’s budgeting practices have evolved to support
the institution’s changing business model. The introduction o f the Strategic Compact in
the late 1990s laid the foundations for developing budgets around programs (rather than
by “line item” costs such as wages, travel, etc,). The Compact also rei$orced a devolved
approach to running the business that i s reflected in today’s budgetingprocess and
systems. Anchored in the country-led model, Vice Presidential Units (VPUs) were given
authority to use their budgets as they saw fit with the expectation that they would be held
accountable for performance. Performance and incentives emphasized meeting output-
based delivery targets, particularly for lending. The performance o f other deliverables,
such as ESW, AAA and other knowledge work, were often difficult to assess.

4. In FY05, to support the implementation o f the Bank’s Results Agenda (which

aimed t o increase the focus on outcomes rather than outputs), the Bank introduced
changes in i t s business planning and budgeting process at the VPU level. These changes
quickly evolved into a broader reform that attempted to integrate strategy formulation,
budgeting, and performance management in a continuous cycle. The emphasis on
integration reflected the need to persistently monitor implementation, adapt to events and
emerging knowledge, and take corrective actions when required. It was supported by a
greater focus on multi-year spending trends and mechanisms, such as the +/- two percent
flexibility band, that aimed to de-emphasize the “budget as entitlement” mentality.
5. Strategy and Performance Contracts (SPCs) were introduced to help VPUs adapt
to this integrated approach. The objective o f these four-part documents (strategy,
resources, risks, performance measures) was t o provide the basis for better-informed
budget allocation decisions across VPUs. The SPCs were also intended to foster greater
accountability in VPs. Quarterly Business Reviews were to be a key senior management
forum where progress in implementingthe Bank’s strategy would be reported,

2
performance assessed, and resources re-allocated where necessary. Implementation o f
these reforms was partial, however, as will be discussed later.
6. Through FY06 and 07, the planning emphasis shifted towards the reallocation o f
b d i n g to priority areas and inter- and intra-unit shifts and trade-offs, using the findings
from sector strategy documents to better inform VPU strategies and plans. There was
also a greater focus on improving productivity. Board concerns during the last planning
cycle regarding the unclear linkages between the “scaling up o f priorities” and the Bank’s
strategy led Management to propose firm budget allocations for one year only in the
FY08 Budget Document, in anticipation o f further work o n defining the Bank’s overall
strategy.

I11- The Strategy, Budget, and Performance management process:

objectives, elements, and past efforts to improve its effectiveness
7. Though we have learnt much during the intervening period, the conceptual
framework o f the Bank’s strategy, budgeting, and performance management framework

.
remains consistent with that outlined in the FY05 reform. It i s intendedto:

. Provide greater strategic focus for corporate decision-making;

Enhance the alignment o f resources with strategic priorities;

.
9 Establish greater accountability for performance and results;
Improve efficiency and effectiveness.
8. The overall process integrates-strategy formulation, strategic and operational
planning and budgeting, and performance measurement in a continuous cycle. I t i s
applicable to all levels o f the Bank - corporate, VPUs, and within units. The process
involves a number o f “checkpoints” which are described in Box I.

3
 Box I:Checkpoints in the Strategy, Budgeting, and Performance management process

DeJining the operating environment: The distinctive characteristics o f the operating

environment, such as threats and opportunities, which drive the strategic work programs
must be defined. The emphasis i s on recent or expected changes in the external or internal
operating context that could affect the achievement o f priority objectives.
Setting the strategic direction: Strategic objectives and priorities are laid out. The primary
focus is on the desired impact on clients. The exercise i s supported by the selection o f
indicators that will help monitor progress against objectives over the medium term.
Making strategic choices: Define the work programs or activities to be undertaken to
pursue the strategic objectives and deploy resources accordingly. At this stage, shifts and
trade-offs are made to accommodate the available resources. T h i s stage clarifies the
relationships between corporate priorities, business lines, sector strategies, key global
programs, and the country-driven model.
Assessing risks: Critical to the process i s an assessment o f risks that may affect the
achievement o f objectives.
Monitoring implementation of the strategy, resource utilization, and overall performance:
A set o f key indicators i s used to measure effectiveness and efficiency over time.
Actions: If performance monitoring reveals progress i s o f f track, actions are developed to
correct course.

9. For descriptive purposes, these checkpoints are best tackled as two distinct cycles

.
and supporting mechanisms such as policies, tools, reports, and data systems:
%4

The planning cycle culminates with the four Board/management engagement points
o n budget and strategy. The objective o f the cycle is to develop/confirm the Bank’s
u*

strategic direction, establish the resource requirements, and optimize the distribution
o f resources across strategic business areas.
The performance management cycle which, from the Board’s perspective, centers o n
the Budget Committee discussions o f the Quarterly Reports t o the Board. The
objective o f t h i s cycle i s two-fold: to monitor progress in implementing the strategy
and to ensure necessary adjustments to work programs are informed by measures o f

. performance that are consistent, objective, and systematic.

Supporting mechanisms include policies that support the multi-year nature o f the
work program, flexible spending authorization, streamlined resource contingency
processes, increased scrutiny o f internal redeployments and productivity gains,
harmonizing data concepts, tools, and systems.
10. As noted in the context section, the conceptual foundations for the overall
process, cycles, and supporting mechanisms are three- to four-years old. Thus, there
have been efforts in the intervening years to improve their effectiveness. The remainder
o f this section describes these efforts.

4
Recent efforts to make strategy setting, and resource and operationalplanning more
effective
11. There has been steady progress in making the planning cycle more effective.
M u c h of this progress i s clearly evident in Board papers and the evolving nature o f Board
discussions on strategy, budgeting, and performance management. Some noteworthy
successes are as follows:
Opportunities for Board/management diaZogue o n strategy and budget have been
increased and systematized with the adoption o f four points o f engagement o n
strategy and budget.
The quality of this dialogue has improved with increased transparency and specificity
in the supporting materials.
The Transparency o f decision-making has significantly improved in the past year as
senior management identifiedthe five key principles for resource allocation’ and
described the events and actions that led to last year’s scale up and resource allocation
recommendations.
More quantitative information has been provided earlier in the planning cycle along
with actual and planned expenditures in areas o f focus.
Reengineered budget documents improve transparency by:
- reporting baseline information in focus areas,
- reconciling scale up efforts with unit budget growth by specifying
redeployments and productivity savings and other cost saving in$iatives,
- broadening the scope o f the resource envelope which supports Bank activities
to include critical external funding sources,
- reporting actual and planned spending and deliverables by the three main
types o f Bank VP units (Regions, Network Anchors and Other Ops and FACs)
in areas o f strategic focus.
A revamped Medium-term Strategy and Finance paper n o w integrates the description
o f Bank strategy, IBRDDDA’s financial outlook, and the administrative budget.
VPUplanningprocesses are a significant improvement from past practices with less
time spent o n multiple iterations o f detailed business plans at the unit level.
Recent efforts to make performance reporting and monitoring more effective
12. As with the planning cycle, there have been steady improvements in the
performance review cycle. Highlights include:
m Improved QBRs: The information content o f Quarterly Business Review has steadily
improved by making strides t o explain data trends in a more strategic context and
express the degree o f management concern as necessary. The Q B R includes a
standardized set o f K P I s spanning key dimensions o f performance that allow for
retrospective and peer comparisons. The Q B R has also added information on

“The World Bank’s Budget: Trends and recommendations for FY08” (SEC R2007-0090), para 1.13, page
8.

5
 portfolio efficiency, improved the reporting o f lending and disbursement data,
provided more information o n sectors and themes, and presents more information on
VPU intra-annual budgetary movements. Rolling presentation o f trends o f recent
performance and expenditures were also introduced.
Initial developments in country-level results reviews: The conceptual underpinnings
o f country-based results reviews are in development. These reviews aim to facilitate
the incorporation o f CAS outcomes in performance management discussions country
by country. Reviews should “add up” to the V P U and Corporate levels and be
synthesized by various dimensions (e.g., sector, theme, client segment). The
principles o f the review framework are found in B o x 11. The review framework
draws from initiatives in the AFR and EAP regions to incorporate results into their
performance management discussions.

.
Box 11: Principles o f a Country-level Results Review

.
Encourage adaptation and learning about development effectiveness in the Bank and at the
country level.

.
Reinforce and amplify staff and managerial focus on strengthening country-level systems
for measuring and using information about results to inform decision-making.
Establish accountability for knowing what levels o f results are being achieved.

.
Facilitate dialogue between within-unit country and sector management teams, and
between Anchor and Regional unit sector management teams.
Provide VPUs and senior management with a single, common source o f information, as

.
the basis for regular discussion and country-level results reviews structured around
meaninghl indicators.
Strengthen the links between resources and results by new tools that further incorporate
%
these principles at both the corporate a&d within-VPU level.
Aggregate at all levels by sectors and client segments.

Past improvements to supporting mechanisms

13. Board members will recognize many o f the improvements in supporting
mechanisms. Others, such as system improvements, are less visible but also important:
Enhanced budgetjlexibility: Although suspended for FY08, the Board approved the
move to greater budget flexibility v i a a multi-year context by supporting three-year
expenditure directions, managed within +/- 2 percent in each fiscal year.
w Carryover elimination: Budget carryovers were phased out so that adjustments to
VPU budgets would be based o n needs and priority, rather than a variance o n their
previous year’s budget.
Productivity tax implementation, and i t s subsequent differentiated application across
units, provides resources to fund emerging priorities and cost pressures in a flat
budget environment.
w Improved tools: SPCs replaced the previous Unit Compacts and Business Plans.
They were designed to help VPUs review what they are trying to do, and h o w t o get
there by highlighting medium-tern strategic directions, risks, work program choices
and trade-offs, and key performance indicators. However, their use in operational
units has not been strong. Consultations with these units revealed the need to modify

6
 SPCs to better recognize the country business model and judgments o n Bank
contributions to specific CAS outcomes. Consultations also revealed a need to
synchronize the timing of SPC preparation (and other planningprocesses at the unit
level) in relation to the corporate planning cycle. In FY07, efforts were undertaken to
incorporate these findings as well as clarifying the presentation o f resource shifts and
trade-offs. Inaddition, VPU performance memos were introduced to allow units to
provide shorter updates in actual time, and units were given the ability to prepare
their SPCs on a “rolling” basis.
Benchmarking o f select “back office” activities (i.e. HR and IT) has guided cost
saving initiatives. More broadly, for the FY08 planning cycle, Management asked
VP units to outline what internal redeployments they intend t o make, which will help
to assess how V P s make strategic choices and adjust their budgets to changes in client
demands, shareholder initiatives, and external events.
Systems and corporate data enhancements were made t o SAP during FY07 to provide
units with the ability to prepare multi-year work program agreements (WPAs).

I V - Proposed Actions to improve the Strategy and Performance

Management Process
14. This section describes the specific work program elements needed t o further
improve the process. Detailed actions for each element are found in Annex Ialong with
expected delivery milestones over the coming two years.
15. Many o f these action plan tasks are well known t o Budget Committee members,
and have broad acceptance o f management. Steps needed t o implement these tasks are
fairly clear and the action plans articulate milestones and deliverables for these tasks.
16. A second category o f tasks are also necessary to improve the overall framework,
but are less well developed. They require intensive consultation with V P U s to test the
robustness o f the ideas and determine actions to effect improvements. Thus, their
completion will take a multi-year effort. The milestones and deliverables for these tasks
are, at present, not as well defined. Thus, the action plan indicates only the initial “next
steps” in moving these elements forward.
17. The remainder o f t h i s section summarizes the key points o f the action plan:
Actions to improve resource and operational planning
18. The three actions to improve the planning cycle remain in conceptual
development.
Explore improvements to the Corporate Planning cycle: Develop a revised planning
cycle that improves the alignment o f planning events between the corporate and VPU
levels and involves appropriate board engagement, all o f which leads to an integrated
set o f corporate plans informed by top-down and bottom-up input.
Explore a more structured framework for making resource allocation and tradeoff
decisions: Design a process or framework to be used as part o f the annual corporate

7
 planning cycle to help make better decisions reIated to allocation o f resources and

. tradeoffs.
Explore means to improve the integration of Trust Funds in the business strategic
planningprocesses: Improve the integration o f Trust Funds with all other sources o f
funds when developing Bank business plans t o help ensure adequate governance and
control over a l l Bank-executed activities
Actions to improveperformance reporting and monitoring
19. O f the action items to improve performance management, Directors will see
tangible evidence o f progress in the short-term. For medium-term objectives, some short-
t e r m “quick wins” are possible.
Continue to improve the performance reporting products: Continue to make
refinements to the key performance reporting products (i.e., QBR, QMR, V P U
Performance Memos, SPC) to improve the transparency and usefulness o f
information.
Improve the integration of external sources of funds in corporate performance
reporting and monitoring processes t o help provide a more complete picture o f the
total cost o f the business.
Explore means to improve reporting on priorities, redeployments, and productivity:
Determine feasible means (e.g., processes, coding schemes) for more effectively
reporting on strategic priorities (i.e., resources, outputs, and results), unit
redeployments, and unit productivity savings.
Explore means to strengthen VPUperformance Gonitoring & reporting:
Specifically, mechanisms and processes for improving the performance monitoring o f
VPU performance against plan, including processes that facilitate timely feedback
and guidance from senior management o n key business issues.
Develop a results reviewfiamework Develop a country-based results framework
that can be used to better inform performance dialogue with results.
Actions on supportingpolicies
20. Only the first action will be completed in the short term:
Improve the Contingency Request process: Identifl improvements to the current
process for allocating central contingency funds t o make it more timely and
responsive to unit needs.
Explore improvements to the use of medium-term budgets andplans: Explore means
and implications o f moving towards multi-year resource plans, including unit level
flexibility t o manage resources across fiscal years.
Actions on other supporting mechanisms
21. Although there i s only a single action under this category, it i s broad in scope.
Improve harmonization of systems, coding structures, & depnitions within the
organization t o help improve the accuracy and completeness o f tracking o f costs and
outputs.

8
 V - Conclusion
22. This paper has elaborated on the underpinnings o f the strategy, budgeting, and
performance management process and summarized recent improvements. As requested,
it has also presented a near term and m e d i u m t e r m action p l a n o f specific tasks that will
m a k e the process m o r e effective in the k t u r e . Management believes that the action plan
i s challenging, but realistic.

9
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Attachment 1: Four Points of Board-Management Engagement on Planning and Budeet
T h i s attachrhent describes the objectives and tentative dates for the four points o f Board
engagement on planning and budget over the coming fiscal year.

Point I: Taking Stock after the Annual Meetings (November 29)

T h i s paper, discussed at the first engagement point, provides Directors with a stocktaking o f the
key themes arising from Development Committee deliberations and the President’s Annual
Meetings speech as well as sector or internal strategies produced in the last year.
T h e paper will also provide Executive Directors a summary o f the process going forward,
focusing on:
Board Engagement: Outline agendas and objectives for the second, third and fourth
engagement points.
Internal Processes: Management processes for moving from thematic stock take to
planning and budgeting..

Point 2: EmergingDirections (January 24)

The second Board engagement point elaborates the Bank’s activity and fbture directions in the
areas identified in the November paper. In particular, the paper would incorporate views f i o m
internal Bank VP consultations o n exploratory questions in the following categories:
Baseline Analysis: H o w are the Bank’s current efforts and resources mobilized in
support o f the identified themes? What do we know about the effectiveness and
adequacy of current efforts? Clients would be identified along with the services
provided, group-wide capabilities, and human and financial resources.
Future Directions: What are the main features o f the forward-looking plans in each area?
What are the considerations that will drive the development o f these plans?
9 Constraints: What are the key operational and business constraints?
Preliminary ideas on the degree o f redeployments, grounded in views from senior
managementsNP discussions in December, would also be presented.

Point 3: Medium Term Strategic Framework (March 27)

The paper’s three-part structure remains valid (strategy, financial health, budget). T h e strategy
chapter will summarize strategic framework and shifts related to the six thematic areas drawing
o n the evolving internal and external dialogue o n future directions. The financial health chapter
would focus o n the issue of future income and capital adequacy for the Bank in relation t o i t s
objectives and evolving strategy. In particular, this chapter would explore a set o f broad-based
principles to govern income allocation, and take account o f potential options to improve return
on IBRD’s equity. The budget chapter would show the medium-term directions for broad
sectoral shifts and the implications for unit-type spending directions. Directors’ comments
would be factored into the final budget decisions that will be presented in the Budget Document.

Point 4: Budget Paper (June 24)

The Budget discussion will focus o n the adjustments arising from the Board’s M T S F
commentary as well summarizing additional cost pressures (i.e. decentralization costs, potential
security cost increases, etc.).
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